Cornerstone

As a Plan Fiduciary...When is the best time to be "Second Guessed"?

Nobody likes to be "Second Guessed" by anyone, but sometimes it happens with or without our choosing and with results ranging from excellent to terrible.  Various professionals provide second opinions as a routine course of their professions, i.e. medical doctors, attorneys, CPA's, etc.  This is usually surrounding a complex medical, legal or tax case or situation.  A new area of business "Second Guessing" is in the 401(k) and profit-sharing qualified plan arena.  The "Second Guessers" can be the Department of Labor or the plan participants (within our Court system) using ERISA standards not "it was a good business decision" standard.  Granted, to date most of the "Second Guessing" has been the very high profile cases when companies use their own publicly traded stock as an investment option within their 401(k) plans and the value of the company stock plunges.  The cost to the plan fiduciaries (whether individual or corporate) and the participants are staggering.  The participants lose because the Company stock value declines, then the participants sue the plan fiduciaries for recovery from the fiduciaries.

A more ominous "Second Guessing" situation WILL occur when the baby boomers, their spouses or their heirs learn that they should have generated a larger retirement plan balance within their 401(k) plans than they actually have accumulated.  How can this happen you ask?  There are a number of reasons for this to happen, but the all-encompassing reason is the plan and the investment fiduciaries did not have a prudent investment process to follow.  A plan and investment fiduciary must be able to show that they have a prudent process in place through which plan and investment decisions are made for the sole benefit of the participants.  If a prudent process exists, and this is the modus operandi of the fiduciary, then the risk of loss in a "Second Guessing" situation will be virtually eliminated.

What should a plan sponsor or fiduciary do?  You might consider being "Second Guessed" now, rather than later.  Finding, correcting, and creating a prudent investment process is critical to being a fiduciary.  Think of this "Second Guessing" similar to a second opinion from your doctor, attorney or CPA.  It might provide you with sound peace of mind versus being "Second Guessed" by the court system or the Department of Labor.

What does the "F word" mean to an investor or qualified plan sponsor?

The "F word" that I'm talking about is "Fiduciary".  The meaning of this term as described in various law dictionaries is "trust", a person (or entity) who has the power and obligation to act for someone under circumstances which require total trust, good faith and honesty.  This is a very high legal and regulatory standard, and this is the standard that a "Registered Investment Advisor" is held.  By contrast, "Brokers" and "Registered Representatives" are held to a much less strict standard, that is, one of "suitability".  The "suitability" standard means the investments they recommend must only be "suitable" for the investor, not necessarily what's best for the investor.

A Registered Investment Advisor must avoid "self-dealing" or "conflicts of interest" in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts him or her.  A Registered Investment Advisor must place their client's interest first, period.  Many brokers or registered representatives call themselves advisors, but hide under the cover of the "suitability" standard rather than come to the plate and be a true client advisor - a Registered Investment Advisor.

Be informed, ask your financial advisor: "Will you be acting as my fiduciary and will you put it in writing?"